What We Learned From Innovint’s Financial Health Webinar

We’ve been loving the recent webinar series published by Innovint on YouTube: Financial Health: Strategies for Sustainable Winery Growth.  The webinar series starts with a video on financial health, Operational and cultural health are covered in subsequent videos.

If you haven’t tuned in yet, I strongly recommend giving it a watch when you have a spare minute.  But we know how busy life is as a winery and business owner, so we’ve jotted down our favorite points from the webinar to share with you in case you’re short on time.

The webinar starts with a recent survey Innovint conducted across the wine industry in a bid to understand the current state of wine business health across the industry, so let’s start there.

Innovint’s industry survey on winery health

Over the past few months, Innovint collected over 450 survey responses from winery professionals at wineries of different sizes and in various regions. While the final data isn’t out yet, they share some key takeaways throughout the video.

Starting with financial health.

Out of 450 survey responses, 54% of winery professionals believe they are in excellent or good financial health, and 83% rate themselves as being in average financial health or better.

To be honest, those numbers seem quite high to us, given the sentiment in the industry and media that wineries are struggling. However, the data from this survey suggests that, despite greater headwinds, wineries have a good understanding of how to manage their financial landscape.

But that’s not to say some wineries aren’t struggling financially. Seventeen percent of wineries that responded rate themselves as having poor financial health.

So, let’s dive deeper into what “financial health” means for a winery in the first place.

What does it mean to run a financially healthy winery?

Every winery leader would have a different answer to what it means to be financially healthy.

For Rick Lawson, Director of Finance for Schaefer Vineyards, it starts with cash flow.

“Positive cash flow. There's always competing goals, whether you want to grow your sales or invest in new plant and equipment, things like that. But the bottom line is, if you're not generating a positive cash flow, you're not going to be around very long unless you have a corporate sponsor with very deep pockets. So, I'm always looking at the cash position, trying to forecast ahead to big outlays that are in the near future, and just trying to manage cash flow.”

Peter Wilmert, CEO of Hudson Napa Valley, takes a slightly different approach

He says the first thing to understand is the proposition of your business.

Meaning, what are you making? What are your price points? What are your channels?

Every wine business is different from the next. If you are a small winery in the Loire, your business looks very different from a large multinational corporation, which looks very different from a pinot noir business in the Willamette Valley or a cabernet business in Napa.

So tackle these main questions to really dig into your metrics. Then, look at what stage your winery is at this point in time.

When just starting out, “financially healthy” will look quite different from what it looks like for a mature business. You’re probably putting a lot of cash into the business, and that’s okay. It takes a lot of money at the beginning to grow inventory and expand.

You may not be in a thriving financial situation at the moment, but you have to be able to look at your timeline and see that, at some point, your business plan starts to pan out.

Which leads us to a great next topic: working towards profitability.

What does it look like to work towards profitability in your winery?

In the first year, very few wineries are profitable. You have to work towards profitability. So, what should your financial goals look like over time as you evolve?

It’s obvious that as you grow, your priorities will shift. So let’s break it down into three stages: starting out, steady, and periods of growth.

Financial Goals When Starting Out

When first starting out, growth doesn’t need to be the goal. Instead, focus on maintaining a steady cash flow and getting the basics down pat. What is your distributor setup like? Are you maintaining healthy profits? Are you cash flow positive?

Financial Goals During a Growth Phase

As you move into a growth phase, when you’re ready to start expanding and pushing for growth, the main goal will be ensuring you can still pay the bills.

It’s one thing to grow the top line, but are you able to grow and still pay all the bills? Buying new vineyards and investing in facilities is never cheap. So the challenge will be to grow the business while still covering all expenses.

You’re going to spend a lot of money now and won’t see the fruits of that investment for 3-4 years, so juggling those costs while things are tight will be the challenge.

Financial Goals for a Steady Business

When your winery is in a steady phase and not in a state of big growth, you need to make sure that you've created something financially stable.  With so many costs rising—the cost of regulation, labor, and anything you want to do—it’s important to be able to manage that.

No matter which phase of business you’re in, Peter Wilmert suggests paying close attention to both your P&L and your cash flow. 

How much visibility do you have over your P&L, and how well do you understand it?  Are you comfortable with understanding your cost of goods sold (COGS) structure, your fixed and variable costs, and how these might change depending on your stage of growth?

Many wineries experience cash flow issues that might not be immediately visible on financial statements, depending on the software you use and your financial expertise.  So, make sure you understand why your net income and cash flows might differ.

What trends are impacting the wine industry’s ability to grow?

Next, the webinar panel dives into a few outside factors that might be hurting your financial health.

If your sales are down, here are a few things that might be causing the problem:

Oversupply of grapes

There’s a big global oversupply of grapes, especially in Europe and the Southern Hemisphere. Even in some areas on the U.S. West Coast, grape growers are struggling because there are more grapes than people want to buy. This oversupply puts a lot of pressure on prices.  This issue with supply and demand isn’t going to be resolved quickly, so many vineyards might struggle with pricing and profitability.

Demographic changes

High-priced wines are typically aimed at older customers who can afford them. As this customer base ages, attracting younger wine drinkers willing to spend big bucks on wine becomes increasingly difficult. With fewer younger buyers interested in expensive wine, growing the business can be a real challenge. This shift is affecting many wineries since younger consumers are often more drawn to craft beers or spirits over wine.

Rising costs vs. pricing

Many wineries are dealing with a tricky situation where their costs are going up faster than they can increase their prices. With so many wine brands out there and an oversupply of grapes, it’s hard to raise prices, especially when some suppliers are lowering theirs or offering discounts.

As a winery owner, you’ll need to keep a close eye on your earnings from different sales channels to see where you’re making or losing money. Focus on the channels that are more profitable and find ways to enhance those.

If raising prices isn’t an option because of market conditions, understanding these details will help you make smarter decisions and adjust your strategies to stay profitable.

What financial metrics should you be keeping an eye on?

When your winery is dealing with challenges like too many grapes or changing customer demographics, it’s even more important to keep track of the right financial details to stay on top of things.

Knowing which financial numbers to watch can help you manage costs and profits more effectively.

Here are three key financial metrics we took away to pay attention to:

Fixed vs. Variable Costs

It’s important to understand the difference between fixed and variable costs. Fixed costs are expenses that stay the same regardless of how much wine you produce, like rent or equipment. Variable costs change with production levels, such as the cost of grapes and labor. 

It’s crucial to understand how these costs impact your profitability. When market conditions are good, it might be easier to overlook these details, but during tougher times, scrutinizing variable costs becomes essential for finding savings and improving margins.

Gross Margins

Gross margins show how much money you make after covering the cost of goods sold (COGS). This includes both your overall gross margin and the gross margins for different sales channels. 

For example, if you’re selling mostly through wholesale and export, your margins might be lower compared to direct sales, where you might expect higher margins. Keeping track of these margins helps you understand if you’re pricing your wine correctly and if your production costs are in line with industry standards.

Trends in Costs and Profits

Watch for trends over time, not just within a single year. Your gross margins can be affected by past production costs, which might not show up immediately. For instance, if you had lower yields in previous years, it could impact your margins now. 

Also, keep an eye on rising costs in areas like labor and insurance, which have risen significantly in recent years. These increases often show up in your costs of goods sold with some delay, so it’s essential to review both current and historical data to get a complete understanding and make informed decisions.​

What about EBITDA?

Last but not least, the panel talks about the importance of EBITDA, or lack thereof.

When it comes to your winery’s financial metrics & financial health, you’ve probably heard a lot about EBITDA. EBITDA stands for Earnings Before Interest, Taxes, Depreciation, and Amortization. It’s a financial metric that can help you understand how much profit your winery is making from its core operations before accounting for certain costs. In other words, it shows how well a business is performing without including things like interest payments, tax expenses, or depreciation of fixed assets.

EBITDA is most useful when comparing the performance of different wineries against each other.  When looking at your own particular situation, EBITDA isn’t the end-all-be-all for understanding your winery’s financial health, especially for smaller or medium-sized wineries. 

Here’s why:

Wineries are asset- and inventory-intensive businesses.  Taking depreciation out of the bottom-line metric can be deceiving. Removing interest, while useful for comparing various businesses, doesn’t make too much sense when looking at your own financial health.

Secondly, for wineries, especially as they are growing, cash flow can be a very different beast than profit.  It’s important to keep an eye on both, and both are arguably much more important to watch than EBITDA.

The one thing that really matters is understanding your profit margins—how much profit you make on each bottle or sales channel. This helps you know whether you’re making enough profit to cover your operating costs (general, administrative, and selling costs), while leaving enough left over to re-invest in inventory and growing your business, not to mention paying back your investment!

For large wineries or those part of big corporations, EBITDA can be useful for comparing different parts of the business or deciding where to invest. But for day-to-day operations and making decisions, other metrics like cash flow and profit margins provide more actionable insights.

Final tips for maintaining positive winery financial health

Last but not least, the team was asked for a few words of advice when it comes to the financial & overall health of wineries. 

The main takeaway? Surround yourself with smart people who can help, because there is always more analysis to be done and more things to do.   So, surround yourself with good people who can help take the financial complexities off of your plate.

And remember, the wine business is one of the singularly most complicated businesses you can get into.  The way you’re going to succeed is if you can really define with crystal clarity with your executive and ownership team where you’re going, how you’re measuring it, and then get really good at measuring it along the way. 

Use good software, hire good financial people, and put the processes in place to be able to get those metrics that you need in order to succeed. 

We strongly recommend watching the webinar in full detail. It’s full of helpful insights and information, much of which we couldn’t summarize down to a single blog post here. 

If you have any questions about your financial health, metrics to track, or anything else we’ve talked about here, please get in touch. 

You can reach out to us by heading over to our contact page here. 

Until next time!